New Rules for Noncompetition Agreements in Massachusetts
On October 1, 2018, the Massachusetts Noncompetition Agreement Act (the “Act”) came into effect, creating several new requirements for noncompetition agreements between employers and service providers based in Massachusetts. The new law does not impact agreements entered into before October 1; however, going forward, employers should evaluate when to seek a noncompetition agreement from a service provider and should update any form agreements to comply with the Act’s requirements. In this post, we highlight five considerations to help guide employers as they revisit their practices for Massachusetts workers.
- The Act does not apply to all agreements containing restrictive covenants.
The Act applies to any agreement between an employer and employee, or otherwise arising out of an existing or anticipated employment relationship, in which the employee agrees not to engage in specified activities competitive with the employer after the employment relationship has ended. For purposes of the Act, “employee” means both an employee and an independent contractor.
There are a number of notable exclusions from the Act. First, the Act does not apply to agreements not to solicit or hire employees, or to agreements not to solicit or transact business with customers, clients or vendors. Additionally, the Act does not govern noncompetition agreements made in connection with the sale of business where the party bound by the noncompetition provision receives significant consideration from the sale.
Perhaps most notably, the Act does not apply to noncompetition agreements made in connection with a separation from employment as long as the separating employee is expressly given seven business days to revoke his or her acceptance of the agreement. If an employer wishes to impose restrictions that would otherwise be unenforceable under the Act, this exclusion may provide an opportunity for an employer to negotiate such provisions as part of a separation agreement.
- Noncompetition agreements are not enforceable against all employees.
Noncompetition agreements subject to the Act are not enforceable against:
Employees who are classified as nonexempt under the Fair Labor Standards Act,
Undergraduate or graduate students in an internship or other short-term employment relationship,
Employees under 18, or
Employees who are terminated without cause or laid off.
As mentioned above, agreements made with separating employees are generally not subject to the Act, and an employer could consider negotiating a separation agreement with an employee falling under one of these categories. Notably, the Act affirmatively states that having an unenforceable noncompetition provision in an agreement does not render the remainder of the contract void.
- Noncompetition agreements must protect a legitimate business interest and be reasonable in scope and geographic reach. Generally, an agreement may not impose restrictions for more than 12 months.
In order to be enforceable, a noncompetition agreement must relate to the protection of one of three legitimate business interests recognized by the Act: trade secrets, confidential information or goodwill. Further, the agreement be reasonable in the scope of proscribed activities. The Act has a presumption that a restriction on the specific types of services provided by the employee at any time during the last two years of employment is reasonable.
Next, the Act requires that the noncompetition agreement be reasonable in its geographic reach. The Act includes another presumption that a restriction limited to geographic areas in which the employee provided services or had a material influence during the last two years of employment is reasonable.
Under the Act, an agreement generally cannot impose noncompetition restrictions for more than 12 months following termination of employment. However, this term can be extended up to two years if the employee has breached a fiduciary duty or unlawfully taken property. The Act does not address whether the restriction period can be tolled if an employee breaches his or her noncompetition obligations.
- Noncompetition agreements must be supported by a “garden leave” clause or “other mutually-agreed upon consideration.”
The Act provides that in order to be enforceable, a noncompetition agreement covered by the Act must be supported by a “garden leave” clause or “other mutually-agreed upon consideration.” Under the Act, a garden leave clause is a provision for the payment of wages on a pro-rata basis during the entire restricted period at a rate equal to at least 50% of the employee’s highest annualized base salary within the two years preceding termination. Employers wishing to provide garden leave as consideration may consider offering employees guaranteed bonuses in lieu of salary in order to reduce the cost of the noncompetition agreement.
The Act does not define “other mutually-agreed upon consideration,” but where an employer seeks to enter into a noncompetition agreement with an existing employee, the Act expressly states that continuation of employment is not adequate consideration. It is not clear under the Act whether an offer of initial employment could serve as sufficient consideration for a new employee. Employment counsel and employers will want to monitor for any regulatory or legal developments addressing this question.
- Employers must observe certainty formalities when entering into noncompetition agreements.
In order to have an enforceable noncompetition agreement, employers must follow certain formalities prescribed by the Act. For a noncompetition agreement with a new employee, the Act requires that the agreement be provided to the employee by the earlier of a formal offer of employment or 10 business days before commencement of employment. If an employer seeks to enter into an agreement with an existing employee, the agreement must be provided to the employee at least 10 business days prior to when the agreement will become effective. Noncompetition agreements with both new and existing employees must be in writing and must expressly state that the employee has the right to consult counsel prior to signing.
These five considerations highlight key elements of the Act, but they are by no means the only issues employers must recognize when entering into a noncompetition agreement. Employers seeking to enter into noncompetition agreements with Massachusetts-based workers should consult with counsel to tailor such agreements to the requirements of the Act and their specific business needs.